On Take or Pay Debate

Posted on April 16, 2017

-This article was originally published by Prience Shrestha in The Himalayan Times on April 16, 2017.

The Independent Power Producers’ Association of Nepal (IPPAN) is quite disgruntled by the fact that Nepal Electricity Authority (NEA) has not yet ratified the “take or pay” provision (i.e., a provision to pay the power developer for the quantum of electricity mentioned in the Power Purchase Agreement (PPA) whether it purchases it or not) in relation to power produced by private hydropower companies. Although the provision was endorsed by the cabinet a year ago on February 2016, and was also approved by NEA itself this January, the sole purchaser, transmitter and distributor of gridded electricity has yet not abided to the new provision. In fact, it is understood that NEA has not even signed a single PPA till date since the ‘take or pay’ provision came into force.

State of NEA as a natural Monopsony

The decision of NEA as an individual firm in delaying the acceptance of “take or pay” provision would not have concerned the private power producers as much if there existed multiple other power purchasing firms in the market happy to substitute the role of NEA. Besides, the market would also not be sensitive to the decisions of a particular firm who reserves the full discretion to practice any business strategy while solely bearing the consequences of it. However, given NEA’s monopsony, the consequence of its trading decisions and activities maintains an extensive effect throughout its value chain (i.e., power producers to consumers) in an intensive scale.

Given that, the decision of NEA to prolong its “take and pay” provision has placed them in a worrisome situation. Since there is no other power transmitting and distributing enterprise that they can pledge to sell their generated power except for the state-owned monopsony, the “no buy” intention of NEA has even threatened the sustainability of the private power producers who rely on revenue from selling their generated power to the only transmitting and distribution authority in the country.

Reverting to the fact that NEA is an independent state owned entity free to make decision for its self-interest, it cannot be directly held responsible for the power produced by the private power producers in Nepal. Besides, given the provision for any entity to freely enter the power transmission and distribution market as per the Energy Act 1992, one cannot also explicitly accuse the government on enforcing government monopoly and taking advantage of it to exploit other independent players preceding it in the value-chain. However, in acknowledging the technical difficulties regarding excessive upfront capital investment requirement in entering the electricity transmission and distribution sector, and the lack of a clear legal framework regarding the same, it simply eliminates the likeliness of seeing profit motivated private substitutes of NEA in this sector in foreseeable future. Besides, inadequate provision for trading power in international market to gain minimum economies of scale for profit feasibility, and the prevailing price regulation in electricity distribution leaves virtually no economic viability for private investors to dive into the electricity transmission and distribution sector. Therefore, NEA naturally holds monopsony status as a power purchaser, and it is suggestive for this state-owned authority to make decision for the well-being of the overall value-chain stretching from generation to consumption “as long it does not compromise its own financial well-being.”

Under the influence of distorted demand forecast

Importantly, accepting the “take or pay” that requires it to purchase the entire power produced by private power producers does not make NEA compromise its priority towards its own financial wellbeing in contrary to what it distortedly believes. It comes to appear that NEA is choosing to stick itself to “take and pay” provision mostly because it believes the demand of electricity in the market will saturate as 456 MW from Upper Tamakoshi Hydro Project joins the national gridline after its completion in 2018. And therefore, it argues that transiting to “take or pay” provision in order to be compelled to purchase any amount of power generated by the producers will lead it to hold surplus power that has no demand in the market.

However, it turns out that NEA’s power demand forecast is very conservative, and falls short of the forecast made in Nepal Concept Paper on National Energy Crisis Prevention and Energy Development Decade (NECPEDD) 2016 (popular among energy enthusiasts and experts) by three folds. Given the considerable power demand in future while considering the probable boost in construction of energy based industry, the chances for NEA to be held up with surplus power that it cannot sell as it purchases the entire generated energy is grim. Besides, given that the country is yet at the state of acute power deficit partially fulfilled by importing additional electricity from neighboring south, the probability of being left with excess power surplus in near future still seems as a far cry. And therefore, it can be reiterated that transiting to “take or pay” provision does not compromise the well-being of the enterprise.

In saying so, it is high time NEA scrambled in implementing what it has already pledged for and committed by Ministry of Energy (MoE) itself. Importantly, in being the largest influencer in energy value-chain, it is imperative for NEA to carefully decide for the well-being of the value-chain of which it is a major part of.